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Special Needs Trusts, Estate Planning for Children with Disabilities

For Special Needs Trusts In S.E. Michigan Only: Call 248-676-2233 to make an appointment with a lawyer.

How many of us know of a friend, family member or co-worker who has a special needs trusts child? I am sure each and every one of us knows someone, if not yourself, that is raising a family with a child that has a disability of some kind.

A survey conducted by MetLife (The Torn Security Blanket: Children With Special Needs and the Planning Gap Executive Summary, April 2005) found that sixty percent of parents did not expect their special needs children to ever be financially independent. In spite of this, the survey found that 68% of such parents had not written a will and 29% had not done anything to prepare for their child’s future financial needs.

With today’s advancements in medical technology, it is almost without a doubt that many special needs trusts children will outlive their parents. Parents cannot help but worry about who will care for the child and how will the child’s needs be met financially. If a family has such a disabled child, it is even more critical that the family have a proper estate plan designed around the needs of the family and the disabled child.

It is especially important that the estate plan protect disabled children without disqualifying them from needed public benefits. It is important that affected families understand the benefits and programs that a disabled child may be eligible to receive. Supplemental Security Income (SSI) is available to disabled children whose parents have limited income and financial resources. In addition, in most states, eligibility for Medicaid is automatic upon establishing eligibility for SSI.

Medicaid can pay for medical expenses which could otherwise swiftly exhaust the assets in a child’s deceased parent’s estate. Other benefits the special needs child may qualify for are subsidized housing, educational equipment and services. The child might also be eligible for vocational rehabilitation services and job training. Although some state and federal benefits programs are available to all persons with special needs, other programs are need based.

"Need based" means that if the disabled child has more than a limited amount of income or assets, eligibility for the benefits will be lost. When agencies are determining if a person is eligible for need based aid, all gifts, inheritances and life insurance proceeds will be included in the child’s assets unless steps are taken beforehand to exclude these assets from the child’s usable income.

One of the first steps in planning for the special needs child is to ensure that the parents have executed Wills that specify a guardian for their child. The person who is designated as guardian will also most likely be designated as a conservator of the child’s financial assets and may also be designated as a successor trustee of any trusts the parents have drafted and executed. It is important that parents understand the differences between the major types of trusts. It is a mistake to assume that any trust (ie: Revocable Living Trust) will protect the child’s eligibility for SSI and Medicaid. Only Special Needs Trusts (also known as a Supplemental Needs Trusts) will preserve SSI and Medicaid benefits. The Special Needs Trust must be in existence before any payment of a gift, monetary legal award or insurance proceeds are received by the child.

Any such funds must be transferred directly into the Special Needs Trust otherwise the money received may cause the disabled child to become ineligible for SSI and Medicaid benefits. In addition, in order to be a special needs trust, the disabled trust beneficiary cannot have access to or control the trust property and the trust must be irrevocable.

For purposes of SSI benefits, the Social Security Administration does not consider trust property in a special needs trust to be a resource of the disabled child if the child (trust beneficiary) is unable to revoke the trust and does not have direct access to the trust property. A “Supplemental Needs Trust" is a specialized legal document designed to benefit an individual who has a disability. A Supplemental Needs Trust is most often a ‘stand alone’ document but it can form part of a Last Will and Testament.

A Supplemental Needs Trust enables a person under physical or mental disability, or an individual with a chronic or acquired illness, to have, held in Trust for his or her benefit, an unlimited amount of assets.

In a properly-drafted Supplemental Needs Trust, those assets are not considered countable assets for purposes of qualification for certain governmental benefits.

Another type of supplemental needs trust is the Third Party Supplemental Needs Trust. In this type of trust a “third party” such as a parent, grandparent, other relative or friend of the family provides the funds and establishes the irrevocable trust for the disabled child’s benefit. The Trustee of a Third Party Supplemental Needs Trust has complete control and discretion in making distributions to or for the benefit of the disabled child.

Medicaid Payback Trust (also known as a “(d)(4)(a) trust”) is another option the parents of a disabled child may consider. This type of trust may be appropriate when the child has received a vested interest in an inheritance, gift, settlement or judgment that would otherwise disqualify him or her from governmental benefits. These funds are put in a court approved trust and are used, subject to court approval, for supplemental needs of the child and to reimburse the government for any Medicaid payments made during the child’s life.

Lastly, there is the Community Pooled Trust Account (also known as a “(d)(4)(c) trust”) in which the child’s assets are transferred into a qualified, non-profit charitable organization that manages a master trust for the benefit of many disabled individuals.

A separate trust is established and held for the benefit of each individual but the master trust pools the various accounts together for management and investment purposes. The charitable organization then administers the individual’s trust account with the advise of designated family or friends of the disabled beneficiary.

As always, it is imperative that the parents consider carefully who to choose as the Trustee of any trust. Special Needs Trusts are only as good as the trustee selected to manage them. The trustee must be an advocate of the child and must be motivated by a desire to improve the quality of life of the child. Above all, the trustee must be honest.

The trustee will have access to a large amount of money and this can create temptation. Because of the possibility of abuse, it is important to have protections built into the trust document. These protections can be accomplished by having several designated persons, interested in the child's well being, that the trustee must account to on a regular basis. In most cases, the child beneficiary may be incapable of monitoring the trustee's actions regarding the trust funds.